In Europe, the picture on one side of the banking balance sheet remains one of shrinking credit (more especially of the productive, private sector kind which is off 5.1% yoy after three years of relative stasis), and, on the other, of growing money supply, shrinking interbank reliance, and haemorrhaging non-EZ exposure (that first of these having seen its intrazone component reduced by an eighth since mid-2012, the second having fallen by 7%).
Though outright monetary shrinkage is now a thing of the past almost across the Zone, there has been no interruption to the tendency for people to hold assets in their most liquid form, nor for the banks to fail to find anyone other than Leviathan to whom to lend the proceeds – by way of bonds, for example, this last kind of accommodation is up 12.1% yoy, representing an increment of €200 billion which is almost equal-and-opposite to the coincident €240 bln decline in non-financial corporation loans. Crowding out, anyone?
Though everyone wishes to trumpet the claim that a smattering of PMI numbers which have at last clawed back to the 50 expansion-contraction watershed has somehow marked a turning point for the blighted region, this pattern of money and credit flows should show just how premature all this fanfare is.
Take another instance: Spanish banks’ loans to non-financial corporates have fallen 20% in the past twelve months to stand a third lower than their peak and to subside back to 2006 levels. Notwithstanding the 25% overall decline in retail sales in the past five years or so – a shrinkage which still shows no signs of abating – the stock of loans to households is only now beginning to dwindle with much of the 7.7% drop in outstanding mortgages coming in only the last year.
Meanwhile, of course, state debt mounts relentlessly skyward, swelling 18.9%, or almost €150 billion, in the twelve months to April and ballooning as a proportion of either overall income or of the government’s ability to raise revenue. Spanish banks, meanwhile, saw a 10% increase in their exposure to EZ sovereigns which remains at a level equivalent to 100% of their capital and reserves. Does anyone seriously think that more-of-the-same – which is all we are being offered – is the recipe to fix a witches’ brew such as this?
The UK, by contrast, may be suffering the effects of too successful an application of crank medicine – meaning poor old Mark Carnage may not get the opportunity to live up to his overblown billing as the home country’s monetary Messiah.
The supply of that money is growing rapidly (resident AMS is running at the sort of 10% nominal, 7% rate typical of the last expansion phase) while the unprecedented, circa £500 billion, 30% gap between M4 liabilities and M4 lending which opened up (and which was plugged by a perilous reliance on wholesale – often overseas – sources of funds) under those joint and successive Lords of Misrule, RobespiBlaire and Culpability Brown, has had 90% of that dreadful expansion unwound with the ratio between the two measures having fallen back to a 25-year low of around 8%. Such a newfound consonance between ends and means implies that the banks themselves will form no future hindrance to credit expansion, as and when the call next arises.
Thus far, though, private sector borrowing – whether individual or business – has been slow to respond outside the exploding student loan sector and the BoE’s figures on property loans and transaction counts seem moribund, despite anecdotal evidence of a resurgence which is reflected in the HBOS price aggregate but not, confusingly, in the Nationwide one. As we have recently argued, however, people do not necessarily need to borrow more in the aggregate to get things churning; they only need to downgrade their individual propensity to hold money as a store of value or as a precautionary ‘call option’ and to begin to employ it more avidly as a transactional medium for turnover to increase, velocity to rise, and asset prices to soar.
There have been any number of false starts in the UK, but it may just be that we are on the verge of entering into the zero to pi-by-two section of the rollercoaster once again. One paradoxical thing that is likely to result from such a change is that the dreadful state of the UK current account is like to become even more dire and yet, perversely, sterling may well strengthen if any uptick – however ephemeral – is seen by a market still broadly underweight the archipelago as diminishing the chances of any further QE by offering an island of growth (hothoused or not) in a cold, boreal ocean of contraction.
Stateside, we have navigated the four main eco-events of the week: the FOMC, the GDP revisions, the NAPM release, and the payroll report with a clear if slightly nervy bias to buying yet more stocks, front-running the dreaded ‘taper’ by selling bonds, and an intriguing hint of a switch from precious to base metals.
As for the Fed, the semantic second-derivative in its press statement was that the pace of recovery was categorized as ‘modest’ rather than ‘moderate’, which might be construed as a subtle hint not to expect policy to change in the immediate future.
The GDP numbers, undergoing their quinquennial revision, shifted a whole series of line items from the intermediate to the final category and hence grew the US by a Belgium or so overnight while moving a number of that measure’s historical wiggles ‘modestly’ up and a few others ‘modestly’ down, in an exercise which surely only serves to underline that our oft-expressed distaste for this jumbled aggregate is very well placed indeed.
We have long argued instead for a total economic spending/production gauge insofar as a one-figure characterisation of such a complex entity has any justification at all (who really believes there can be such a thing as a meaningful ‘global’ temperature anomaly, for example). Looked at that way—and apart from the fiddling which took place within the mystical realm of imputation (something we also try to strip out, due to our curmudgeonly prejudice for actual, cash-based transactions over the cloud cuckoo land of transfers of virtual goods and services) – not an awful lot would have been changed by this grand numerical vanity, as far as we can see at present.
In passing, are we to assume that the tiresome canaille of NGDP targeters are frantically redrawing their trend lines as we speak, before rushing out unblushingly to beg for even more inflationary impetus from the central banks, no matter what the result of this recast series? Probably, for it would be too much to expect that it afforded them a moment’s pause in which to reconsider the shaky intellectual and dangerous political basis for their fixation.
Sticking to revenue generation – no matter whether it takes place between businesses high up the food chain, or originates when Jane Doe fills her shopping basket – we think we get a better feel for what is happening (and how quickly it is doing so) all along the structure of production and since this approach gives an equal weight to such non-trivial, often more volatile sectors such as those two thirds of manufacturing which do not make it into the GDP count, or the similar proportion of wholesale and retail trade which does not even qualify for inclusion in the gross output numbers, the likelihood is that we get a superior read and certainly a more advanced warning of that potential trouble which is a constant goal of economic monitoring.
We leave it to those who care to give a detailed exposition of the minutiae of the changes effected: we would just like to wonder at the statistical arrogance which can recast numbers as far back as the Jazz Age. Regarding the ‘capital’ content of the ‘creative arts’, we are a little at a loss as to what smoothed, exponential, X-12 Arima adjustment one applies to a Picasso or a Monet in order to make it compatible with the ‘investment’ quotient of some modern installation artist’s cynical daubings of his excrement on a gallery wall. How did the Jazz Singer compare with Top Hat, or The Maltese Falcon with Goldfinger, the triumphant Dark Knight with the execrably dire Lone Ranger, or Madagascar XXVII against Fast & Furious XIX (or whatever instalment it is we are up to now)?
Then there was the pensions wheeze. Ironically being delivered in the week when S&P noted that the 500 index’s members posted record pension and post-retirement benefit deficits last year of no less than $687 billion, the BEA’s new methodology henceforth counts contribution shortfalls of this type as a notional loan by the firm on which it will pay virtual interest, thus adding a corresponding phantom amount to the totals for the personal income and personal saving of their employees! Taken to an extreme, if admittedly an absurd one, this would imply that were my boss to fail to adhere to any of the pecuniary terms of my contract, it should be a matter of indifference to me, since I will simply be lending him my salary alongside my pension, making me just as well-off as before, if a trifle less weighed down with coin until that happy day when (if) he munificently makes good the shortfall. Ugh!
Another reminder of the suspect nature of statistical series to whose fractions of a percentage change we insist on attaching a wholly spurious importance can be seen in the discrepancy between the BEA’s NIPA estimate of wages and those we can derive from the BLS employment figures. According to the first reckoning, private wage income rose a creditable 4.3% annualised from QII’12 to QII’13, but the latter’s hours x wages product only advanced 2.8% between the same two endpoints. Within that, the BEA figured that manufacturing wages increased by 2.7%, while the latter showed a less disparate, but still noticeable, 2.4% increase.
As for the employment report itself – another of our less esteemed statistical pots pourris – this was, on the face of it, mildly disappointing, with an unremarkable 165k jobs added in July and back revisions subtracting a further 26k from the running total.
In fact things were worse still, if we suspend our usual cavils and take the numbers we were given at face value. Consider that, of the one million new jobs added in the last four months, less than a fifth were full-time in nature (thank you, Obamacare!) while no less than seven-eighths were taken by women. Nothing against the ladies, per se, you understand, but it is an undeniable fact – over whose possible cultural, institutional, and biological causes we have no wish to become embroiled – that the average female job involves less pay, fewer hours, and a deal less value added than the average male job.
Hence, while any expansion of work is not to be sneezed at, nor any honest labour derided, it is nonetheless hard to escape the conclusion that things are not exactly cooking with gas. Partial corroboration here can be had from a glance at the BEA’s guess at real, per capita disposable income which has grown in the past year by precisely zero percent, even if you accept their lowball 1.1% deflator and the higher salary count we discussed above as acceptable inputs to the calculation.
Attacking this from another angle, we can also see that there has been no new increment of manufacturing hours since the start of last year while the real wage fund (hours x pay / CPI) is falling at close to a 1% annual pace – not yet slow enough to signal a full-blown recession (under the mainstream classification, at least) but a matter of no little concern, regardless.
Add to this the fact that manufacturing shipments have dipped to a level which has been followed by a recession every time it has occurred in the past quarter-century bar one if you allow us to promote the Asian Contagion of 1998 (which brought severe hardship to half the people on the planet and panicked the West into effecting some rather damaging rate cuts) to honorary membership of the NBER’s US Recession Hall of Infamy – that sole exception being the occasion of the 1996 GM autoworkers’ strike whose settlement saw a swift restoration of normal service.
Widening out manufacturing to add in trade sales and a similar picture emerges: business is as slow as it has ever been outside of a recession over a forty-two year stretch – this time barring only the ‘false alarm’ in 1986-7 which was, at the time, nonetheless sufficient to spook the incoming Greenspan Fed into slashing interest rates by 2 1/8% in short order and so to leave the funds rate at ten year lows.
Given all this, the last big number of the week above was truly extraordinary, for the NAPM jumped from a lacklustre 50.0 all the way to a two-year high of 55.4. Along the way, the production component soared to a nine-year peak which was in the 95th percentile of the last half-century’s readings after a two-month gain so exaggerated that it hit the 3.3 sigma mark and so intruded into territory previously reserved for the initial snaps-back from the deep recessions of 1974-5, 1981-2, 1984-5, and – what else? – the GFC itself.
Given that NAPM tends to fluctuate in rough synch with business revenues (what else can a boss quickly estimate when he fills in his monthly questionnaire?) and that a plot of its employment component (which saw its largest jump in four years to reach a one-year high) also tends to track that presently anaemic wage fund series we mentioned earlier, it is hard to resist the suspicion that this was nothing more than a rogue result and that it will suffer a similarly dramatic – and similarly inexplicable – collapse next time around.
On top of this, mortgage purchase applications are sharply lower (refinance apps have been cut in half); lumber is falling as multi-family housing starts (domain of the REO-to-Rent speculative crew) have plunged 35% to a level consistent with the last two housing busts; private non-residential construction spending has stalled out, stuck at the same levels as a year ago and 30% blow the bubble highs; and West Coast container trade flows have declined.
Nobody may wish to believe it, but it just might be that the US economy has seen its best for this phase of the cycle.
Where does that leave assets? Arguably overpriced and overbought.
The Value Line, equally-weighted average has just touched yet another new high, up almost 40% since mid-November in a run which has not even seen a correction of more than 5.2%. There it stands supreme, some 60% over the pre-Crash peak and no less than three times what now look like the Tech Bubble foothills. In doing so, since the Age of Irrational Exuberance began with the second half of the ‘90s, the index has outstripped revenues by a factor of more than four.
Meanwhile, the VIX has swooped to a low only once briefly undercut since before the last New Era started to lose its lustre in early 2007. As a result, our ‘Blue Sky’ index – the OEX divided by the VIX, being an inverse representation of what people perceive to be the worth of buying price protection— has jumped to the upper third of the ninety-ninth percentile of the past quarter-century’s distribution, an anoxia-inducing plane only briefly exceeded just as the first rumblings of the forthcoming doom started to afflict the Boom in the March of 2007.
A growing, if still not yet critical, concern is the fact that while stock yields are falling (multiples are expanding), those on bonds are heading northward. In the US, this has meant that BAA bonds are their least expensive vis-à-vis equities in three years, if still well below the last three decade’s norms.
More intriguingly, the total return ratio between the MSCI World and the JPM Global Aggregate has completed a 4-1/2 year, 100% run since the 2009 depths, exactly as it did between 1995-99 and 2003-7, a move which culminated both times in a major stock market top.
As we have remarked previously, margin debt—whether outright, less credit balance or minus mutual fund liquid assets is near previous bull market peaks. But perhaps the most compelling of all is the constant-dollar price of Sotheby’s shares, BID/CPI. An infallible sign of a major asset bubble, this indicator hit almost identical peaks in 1989, 1999, and 2007 and fell 5% or so short in the Great Reflation to spring 2011.
After a 40% run in the stock price since mid-April (25% in the last six weeks alone), this gauge is now nosing well up above the snow line. Sold to the gentleman in the red braces!